When shopping for a homeowner’s insurance policy, it’s important to understand the differences between the types of coverage offered. The coverage you select will affect the premiums you’ll pay, the amount you’ll receive if your home is destroyed, and how much you’ll have to pay out of pocket after a loss.

Homeowners Insurance Coverage for Replacement Cost

Replacement cost coverage will pay the amount of money required to rebuild your home using similar materials even if construction costs have risen since you took out the policy.

It’s important to accurately assess your home’s replacement cost so that you are insured to 100 percent of the value. When calculating replacement cost, insurance companies look at the cost of labor and materials, not the cost of land, the amount owed on a mortgage, or a house’s current market value. Factors such as a prime location are not considered when calculating replacement cost.

Your home’s market value may be much higher than its replacement cost since its market value accounts for factors such as location, while replacement cost is based only on the cost to rebuild the structure. Your house’s replacement cost may be higher than market value if the house is old and has outdated features that aren’t up to current building codes. If the house is destroyed, it will have to be rebuilt in a way that makes it compliant with current building codes.

If you don’t have replacement costs coverage, you may find that when you file a claim, construction costs have risen so much because of inflation that your insurance payout isn’t enough to rebuild your home.

Why It’s Important to Choose Replacement Cost Coverage

Many homeowner’s insurance policies offer coverage for actual cash value. That type of coverage factors in depreciation. If you choose actual cash value coverage and your home gets destroyed by a covered peril, you may receive significantly less than the amount required to rebuild it.

Get Help Choosing the Right Homeowners Insurance Coverage

If you have questions about homeowners insurance, contact Petruzelo Insurance. We can explain your options and get quotes from several leading insurers so you can select the policy that best fits your needs and budget.